How COVID-19 is affecting the property rental market

Rental markets in Australia have taken a beating from COVID-19, with rents and yields falling in inner city areas, CoreLogic research showed.

Prior to the pandemic in 2019, rental markets were tightening as the levels of property investment and development had reduced, impacting rental supply, according to the firm’s head of research Eliza Owen.

But the rental market has shifted gears thanks to COVID-19. The most significant factors to the changing market are:

  • Closed international borders, pushing down rental demand from new migrants.
  • Job and income losses in sectors where workers are more likely to rent.
  • Added stock as holiday homes are converted to long-term rental accommodation due to the collapse of the travel market.

Which rental markets have been affected by COVID-19?

Suburbs in Sydney, Melbourne and Hobart have been most affected by the nosedive in rents. Out of the top 20 capital city suburbs which have seen the biggest drops, 10 were in Sydney, while Melbourne and Hobart each had five suburbs on the list.

Properties in inner Sydney and inner Melbourne areas have seen the biggest drop in rents.

Rental values in Sydney’s Haymarket suffered the most significant decline nationally, plunging by 7.2 per cent in the three months to June, according to CoreLogic. This was followed by Barangaroo and Melbourne’s Southbank, both seeing rental drops of 7 per cent.

Rents in both the Sydney and Melbourne CBDs dipped by 6.9 per cent.

In Sydney, the median weekly dwelling rent declined by 1.3 per cent to $525 in the three months to June 2020. Weekly unit rents in particular fell by 2.1 per cent in the same period to $525.

Dwelling rents in Melbourne edged down by 1 per cent to $440, with units dropping by 2 per cent to $440 a week.

The median weekly rent across the combined capitals was $460, down 0.7 per cent.

“Investors should note that inner-city unit markets pose a particular risk in the current environment, with rental values likely to fall alongside property values,” Ms Owen wrote in the ANZ-CoreLogic Housing Affordability report.

Gross rental yields are also plummeting in Sydney and Melbourne, where it has fallen by 0.6 per cent and 0.5 per cent respectively in the 12 months to June 2020.

Across the combined capitals, yields have declined by 0.5 per cent in the same period.

How lower levels of rental property supply could hold up rents 

As rents fall amid an uncertain economy and jobs market, investor demand for real estate has dwindled. New investor mortgage activity is at its lowest since January 2019, figures from the Australian Bureau of Statistics (ABS) showed.

The monthly value of investor housing finance commitments dived by 15.6 per cent to $4.2 billion in May 2020. And investor mortgage commitments as a percentage of total housing finance commitments tumbled to 25 per cent in May 2020 from 32 per cent in May 2018.

With less new supply on the rental market, rental market conditions could hold up if the number of investors in the property market remain low.

“Before the onset of the pandemic in Australia, investor participation in the housing market was at its lowest since 2001,” Ms Owen wrote.

“If sustained, this suggests that the decline in demand for rentals could be partially offset by a decline in the supply of rental property.”

Rental listings are already decreasing gradually across the combined capitals. Total rental listings fell by 0.3 per cent when comparing the four weeks to March 15 with the four weeks to June 28, according to CoreLogic. New rent listings dropped by 3.8 per cent when looking at the same periods.

However, in Sydney and Melbourne, supply is on the rise. Melbourne led the hike with rent listings up by 3,730, and Sydney’s listings jumped by 1,043.

It should be noted that the data was released before the new stage four lockdowns in Victoria were announced in early August.

What investors should know in a falling rental market

Many everyday Australians invest in the property market using their life savings to build and retain wealth. Rental market conditions are expected to “directly influence investor demand over the next few years, which could affect both prices and construction”, according to Ms Owen.

But property investors may be less affected during the slump if they:

  • are in the market for the long haul and are ready to hold;
  • have a healthy amount of equity in their property; and
  • have a stable income.

If your tenant has been asking for rent reductions, or if your property is in an area hit by the downturn, you may run the risk of falling into mortgage stress. It may be worth considering refinancing your mortgage to reduce your repayments and improve your cash flow.

But refinancing may not be an option for everyone. If you don’t have enough equity built up in your property, or if you’ve deferred your mortgage, you may not be in a position to refinance. 

Another option is to approach your lender and ask for a rate reduction. Given the generally low interest rates across the board, it’s possible your lender may consider discounting your rate.

Lowest ongoing variable rates on RateCity.com.au

Lender Advertised rate
Reduce Home Loans

2.19%

Homestar Finance

2.29%

Well Home Loans

2.32%

Mortgage House

2.34%

Tic Toc

2.39%

Source: RateCity.

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What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

How much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

What percentage of income should my mortgage repayments be?

As a general rule, mortgage repayments should be less than 30 per cent of your pre-tax income to avoid falling into mortgage stress. When mortgage repayments exceed this amount it becomes hard to budget for other living expenses and your lifestyle quality may be diminished.

What is mortgage stress?

Mortgage stress is when you don’t have enough income to comfortably meet your monthly mortgage repayments and maintain your lifestyle. Many experts believe that mortgage stress starts when you are spending 30 per cent or more of your pre-tax income on mortgage repayments.

Mortgage stress can lead to people defaulting on their loans which can have serious long term repercussions.

The best way to avoid mortgage stress is to include at least a 2 – 3 per cent buffer in your estimated monthly repayments. If you could still make your monthly repayments comfortably at a rate of up to 8 or 9 per cent then you should be in good position to meet your obligations. If you think that a rate rise would leave you at a risk of defaulting on your loan, consider borrowing less money.

If you do find yourself in mortgage stress, talk to your bank about ways to potentially reduce your mortgage burden. Contacting a financial counsellor can also be a good idea. You can locate a free counselling service in your state by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.

What is a guarantor?

A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

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We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

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